GROUP 3E

FAC1502-SEMESTER 01-2016
UNISA
ADJUSTMENTS &
CLOSING OFF PROCEDURES
PREPARED BY E-TUTOR MR RAMASHAU ALUWANI
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

MENU

INTRODUCTION
ADJUSTMENTS
CLOSING OFF PROCEDURES
INTEGRATED EXAMPLES
MUST DO EXERCISES
SELF ASSESSMENT
INSPIRATIONAL POEM

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

INTRODUCTION
Dear members
Study unit 6 and 7 is one of the critical topics which are
integrated in the exam and it is important that you master this
topics.
Let me know if you need clarity on any issues

Kind regards
Mr. Ramashau Aluwani
E-Tutor: FAC 1502 (Group 3E)
"We become what we think about most of the time, and that's the strangest
secret." Earl Nightingale
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

STUDY UNIT 6: ADJUSTMENTS

Step 1: Identify the accounts that must be adjusted
Step 2: Determine how the accounts would be
affected and what the balances of these accounts
should be
Step 3: Calculate the amounts involved in the
adjustment
Step 4: Record the necessary adjustments in the
general journal and post the entries to the ledger
Step 5: Ensure that the new balances of the accounts
are now correct.
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

ADJUSTMENTS
Prepaid Expenses
Is an expense which has been paid during the current
financial period, where all or part of the expense
relates to a future financial period.
Insurance and advertising are good examples of such
expenses.
Prepaid expenses are shown as current assets in the
Statement of Financial Position

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

ADJUSTMENTS
Accrued expenses
These are expenses which have been incurred by an
entity but which have not yet been paid by the end
of the accounting period.
Examples: Salaries, Rent expense, Telephone, Water
& Electricity, Interest on Loan etc.
In arrears, outstanding, due , not yet paid.
Accrued expenses are shown as current liabilities in
the Statement of Financial Position
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

ADJUSTMENTS
Consumable stores on hand
You mighty have wondered why items such as
stationery are classified as expenses.
Surely stationery has value, the reason it is regarded
as an expense and not an asset, is because it is used
up (consumed) within the entity within one year.
Examples : Stationery, Packaging materials etc.
The stationary on hand is an asset is shown in the
Statement of financial position under current assets.
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

ADJUSTMENTS
Income received in advance
Income which has been received during the current
financial period but relates to a future financial period
Only the portion relating to the current financial period
must be recorded as income, and an adjustment is
necessary for the portion received in advance.
Income received in advance is not yet earned so it must
be deducted from total income to arrive at the correct
income earned during the financial year.
Examples: Rent Income, Commission received etc.
Income received in advance is shown in the Statement of
Financial Position under current liabilities
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

ADJUSTMENTS
Accrued income
This is income earned by the entity in respect of
services rendered but for which no payment has
been received
Examples : Commission income, Rent income,
Interest on fixed deposit etc.
Accrued income is shown in the Statement of
Financial Position under current assets

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

ADJUSTMENTS
Credit Losses
Any entity grants credit to its customers runs the risk of
having some of those customers not paying their debts.
If it is expected that the amount due will not be paid by a
customer, then this amount must be removed from the
debtors control.
The amount written off is disclosed as an expense in the profit
or loss account
When a debt is written off, the customers individual account
in the debtors subsidiary ledger and then also the debtors
control account in the general ledger is credited.
The amount is debited to a credit losses account (an expense
account) which is closed off to the profit or loss account
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

10

ADJUSTMENTS
Allowance for credit losses
In order to show the correct amount of total debtors on the
statement of financial position, it is prudent for the entity to
estimate how much of the debts owed to it will be paid.
When an allowance for credit losses is created or increased,
the credit losses account (expense) is debited and allowance
for credit losses account is credited
In the statement of financial position, the allowance for credit
losses is disclosed by deducting it from the debtors control
balance.
It is shown as part of trade and other receivables in the
Statement of Financial Position

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

11

ADJUSTMENTS
Depreciation
When an entity buys an asset which is intended
to be used in the entity for more than one
financial year, that asset is described as noncurrent asset.
The loss of value is known as depreciation
Depreciation is calculated for each accounting
period using an agreed method of depreciation
Depreciation is an expense which allows for
matching of the original cost of the non-current
asset against income generated by the asset
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

12

Example of Journal Entries

Debit
Prepaid Expense (B/S)

Credit

xxx

Insurance (I/S)

xxx

Telephone/Salaries (I/S)

xxx

Accrued Expenses (B/S)

xxx

Inventory: Stationery (B/S)

xxx

Stationery (I/S)

xxx

Rent Income (I/S)

xxx

Income Received in Advance (B/S)

xxx

Take Note: I/S To be transferred to Statement of Comprehensive Income

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

13

Example of Journal Entries continue

Debit
Accrued Income (B/S)

Credit

xxx

Commission income (I/S)

xxx

Credit Loss (I/S)

xxx

Debtors Control (B/S)

xxx

Credit Loss (I/S)

xxx

Allowances on Credit Losses (B/S)

Depreciation (I/S)

xxx

xxx

Accumulated Depreciation (B/S)

xxx

Take Note: B/S To be transferred to Statement of Financial Position (Balance Sheet)

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

14

STUDY UNIT 7 CLOSING OFF

PROCEDURES
INVENTORY SYSTEMS (TRADING INVENTORY)
PERPETUAL INVENTORY SYSTEM
PERIODIC INVENTORY SYSTEM

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

15

PERPETUAL INVENTORY SYSTEM

The business keep a continuous track of inventory
levels for the different inventory items it sells.
Ideally suited to a business that sells items that
can be easily identified, measured and a value
attached to them.
Purchase of inventory is recorded directly into the
inventory account at cost price
At time of sale, the cost price is transferred from
the inventory account to the cost of sales
account.
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

16

PERPETUAL INVENTORY SYSTEM

Cost of sales is determined with every sales
transaction: Debit: Cost of sales, Credit:
Inventory with the cost value of the sales
No purchases or purchases returns accounts
are kept
A physical inventory count will only disclose
shortages (or surpluses) in inventory
Refer to page 121 of the Study Guide (Golden
rules)
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

17

PERIODIC INVENTORY SYSTEM

The purchase of inventory is recorded in the
purchases account and not an inventory
account.
Inventory returned - recorded in a purchases
returns account.
Cost of sales is not determined at the time of
the recording of the sale but can thus only be
determined at the end of the financial period
after a physical inventory count has been
done.
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

18

PERIODIC INVENTORY SYSTEM

A purchases and purchases returns accounts
are kept
No cost of sales account is kept. Cost of sales
is determined via entries in the Trading
account
A physical inventory count is essential.
For more info refer to page 125 of the Study
Guide (Golden rules)
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

19

CLOSING OFF OF NOMINAL ACCOUNTS

To determine the financial result of an entity, the nominal accounts are
closed by means of closing journals and transferred to the trading account
(a nominal account) in the case of trading entities and/or to the profit or
loss account.
The gross profit, as determined, is debited to the trading account and
credited to the profit or loss account (a nominal account) .
All the other nominal accounts with balances such as commission income,
rent income, discount received, telephone expenses, water & electricity
and salaries are (closed off) and the profit or loss account is accordingly
debited or credited.
The difference between the debit and credit sides of the profit or loss
account results in the profit or loss which is, in turn, transferred to the
capital account.
The profit or loss account is therefore, also closed off.
All nominal accounts MUST be closed off (made NIL) at the end of the
financial period to either the Trading account or Profit or Loss account.
For more info read from page 128 of your Study Guide

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

20

TRIAL BALANCE
A Trial Balance is a list of debit and credit balances taken from the general
ledger accounts. It is divided into two sections, namely a financial position
section and a nominal account section.

Pre-adjustment trial balance

o Test the correctness of the entries after the posting from subsidiary journals to
the general ledger
o Test the requirements of the double-entry principle have been met
Post-adjustment trial balance
o Is complied after the all journalised adjustments have been posted to the
general ledger.
Post-closing trial balance
o Is complied after the closing journal entries have been posted to the ledger.
o all the nominal accounts are closed and the profit or loss as well as drawings
are transferred to the capital account.
o All that remains in the trial balance are the assets, liabilities and equity
accounts (Refer to page 110 of your Study Guide )

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

21

TIPS
In the exam you are expected to know the principles
and Structure or Format of the financial statements.
You may be asked to pass journals (adjustments) or
to take adjustments into considerations. Refer to
Previous Exam paper.
There is a similar integrated example in the study
guide and I would like you to do before you attempt
the previous question papers.
NB. You will be required to answer all questions in
exam within two hours. Prepare yourself now!!!

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

22

INTEGRATED EXAMPLE:
EX.2 - STUDY GUIDE (PAGE 293)
ADDITIONAL INFORMATION:
(a) Stationery on hand at 28 February 20.1, R150.
(b) An allowance for credit losses of R405 on
outstanding trade debtors' balances must be created.
(c) Rent income amounts to R1 500 per month and the
rental has been charged for the full financial year.
(d) Provide for interest still outstanding on mortgage
bond.
(e) Provide for depreciation on furniture and fittings at
15% per annum on cost price.
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

23

REQUIRED
(1) Prepare the Statement of Comprehensive
Income of Peter Pumpkin for the year ended 28
February 20.1
(2) Prepare the Statement of Changes in Equity of
Peter Pumpkin for the year ended 28 February
20.1
(3) Prepare the Statement of Financial Position of
Peter Pumpkin for the year ended 28 February
20.1
(4) Show the Notes for the year ended 28 February
20.1
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

24

MUST KNOW
IN EXAM YOU MAY BE EXPECTED TO PREPARE THE FOLLOWING:
JOURNAL ENTRIES TO BRING ADJUSTMENTS INTO ACCOUNT
CLOSING JOURNAL ENTRIES (CLOSING TRANSFERS)
PREPARE GENERAL LEDGER
E.G TRADING ACCOUNT & PROFIT OR LOSS ACCOUNT IN THE
GENERAL LEDGER

STATEMENT OF PROFIT AND LOSS & OTHER

COMPREHENSIVE INCOME
STATEMENT OF CHANGES IN EQUITY
STATEMENT OF FINANCIAL POSITION
NOTE TO FINANCIAL STATEMENT: PPE
PRACTICE, PRACTICE & PRACTICE MAKES IT PERMANENT
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

25

MUST DO EXERCISES
STUDY GUIDE
6.5 REVISION EXERCISE (PG 110-111)
INTEGRATED EXAMPLE (PG 143 -144)
REVISION EXERCISE 5 (PG 157)
REVISION EXERCISE 8 (PG 163)
EXERCISE 15.2 (PG 290)

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

26

MUST DO EXERCISES
PREVIOUS EXAM QUESTION PAPERS

QUESTION 1 (MAY-JUNE 2013)

QUESTION 3 (OCT-NOV 2013)
QUESTION 1 (MAY-JUNE 2014)
QUESTION 3 (OCT-NOV 2014)

2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

27

SELF ASSESSMENT
NO.

TOPIC

1.

STUDY UNIT 1 -5

Done

2.

STUDY UNIT 6- ADJUSTMENTS

Done

3.

STUDY UNIT 7- CLOSING OFF PROCEDURES

Done

4.

ASSIGNMENT NO.1

Done

2016-03-08

STATUS

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

28

INSPIRATIONAL POEM
There is inside you
All of the potential
To be whatever you want to be,
All of the energy
To do whatever you want to do.
Imagine yourself as you would like to be,
Doing what you want to do,
And each day, take one step
Towards your dream.
And though at times it may seem too
difficult to continue,
Hold on to your dream.
One morning you will awake to find
That you are the person you dreamed of,
Doing what you wanted to do,
Simply because you had the courage
To believe in your potential
And to hold on to your dream.
2016-03-08

by: Donna Levine

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

29

KEEP IT UP!

THANK YOU!!!
2016-03-08

UNISA E-TUTOR: A. RAMASHAU - FAC1502-S1-16-GROUP3E

30